Official Post-Confirmation Committee of Creditors Holding Unsercured Claims v. Markheim

Opinion

STATE OF MAINE SUPERIOR COURT YORK, ss. C M L ACTION DOCKET NO. CV-04-040 ) - . - \: 1 I -,c 1

,' J THE OFFICIAL POST- CONFIRMATIONCOMMITTEE OF CREDITORS HOLDING UNSECURED CLAIMS ORDER ON PLAINTIFF'S MOTIONS (1)TO CONFIRM Petitioner ATTACHMENT AND (2) TO DISMISS CHAIM MARKHEIM v. AS A DEFENDANT p** ' - CHAIM MARKHEIM, A N N b . x)\ .d MARKHEM, AND RYA@ a ;. -- . MARKHEM 9 Respondents aa =%

Before the court is Plaintiff the Official Post-Confirmation Committee of

Creditors Holding Unsecured Claims' ("Committee") Motion to Confirm the

Attachment Against Anna Markheim ("Motion to Confirm Attachment") as well as

the Committee's motion to dsmiss Chaim Markheim as a party to &us action.

On December 11,2003, the Committee filed a complaint in the District Court in

York, Maine, for fraudulent conveyance, naming Chaim Markheim and Anna

Markheim as defendants. Shortly thereafter, the Committee requested and was

granted by the District Court an ex przrte attachment and trustee process against both

named defendants ill the amount of the bankruptcy judgment against Chaim

Markheim. With this order, the Committee placed a lien on Ms. Markheim's real

estate in York co~mty. About ten months after the initial attachment, having

discovered other property of Ms. Markheim, the Committee filed a motion for subsequent attachment with h s court.' Ms. Markheim opposed the motion, and

brought a motion to modfy the orignal ex parte attachment and trustee process. On

November 3, 2004, h s court denied Ms. Markheim's motion to modify the

attachment and granted the Committee's motion for renewal of attachment. Ms.

Markheim appealed these decisions to the Law Court, wluch vacated them on July 15,

2005, and remai-tded the case to h s court for further proceedings consistent with its

opinion.

Many of the factual details of h s case are disputed. However, it is clear at

least that at some point in the late 1990s, a company by the name of Helionetics, Inc.

filed for bankruptcy in the U.S. Bankruptcy Court for the Central District of

California, Santa Ana divison. Chaim Markheim was an officer of h s company, and,

as of November 15, 2002, a judgment debtor in the company's bankruptcy. On h s

date, the bankruptcy court entered a default judgment against Chaim Markheim for

breach of fiduciary duty, and awarded the Committee2 $4,833,437.50 plus pre-

judgment interest in damages. The court also avoided a transfer to Chaim Markheim

from Helionetics, Inc. of 13,637 shares of KSW, Inc. stock.

The Committee alleges that, in the period from January 7, 2000 through

December 20, 2001, Chaim Markheim made numerous transfers of cash to Ms.

Markheim, who was during the relevant period either married to or recently divorced

from Chaim Markheim. It is unclear when Chaim Markheim left California, but at

some point, probably in late 2001, he &d leave the jurisdiction. Most of the claimed

transfers appear to have taken place before Chaim Markheim left California, but some

transfers occurred after he had left. During h s entire period of January 7, 2000

1 On January 29,2004, Ms. Markheim had removed the case to Superior Court. Then called the Official Committee of Unsecured Creditors of the Estate of Helionetics, Inc. through December 20,2001, however, Chaim Markheim was indebted to the estate of

Helionetics, Inc. for some as-yet undetermined sum of money, for breaches of

fiduciary duty whch occurred before the year 2000. It is uncertain whether Chaim

Markheim was achvely engaged in settlement negotiations with the bankruptcy

estate during h s period, although the affidavit of Arvel Bowyer on behalf of the

Committee indicates that he was.

After the default judgment had been entered against Chaim Markheim on

November 15, 2002, the Committee pursued h m for payment. Based on information

provided by Chaim Markham's son, Ryan Markheim, Chaim Markheim was traced

to an apartment building in Herzlia, Israel. At the request of the Committee, a local

attorney, Leon Fine, visited t h ~ buildng s on September 9, 2004, and was told by the

concierge that Chaim Markheim lived in the building until about 18-24 months ago,

and that he left no forwardng address. The Committee has not had any success since

that time in locating Chaim Markheim.

I. MOTION TO DISMISS CHAIM MARKHEIM AS A DEFENDANT

The Committee has moved to dismiss Chaim Markheim as a defendant in h s

suit, claiming that, despite their best efforts, they have been unable to locate hm, and

that serving process on Chaim Markheim by publication in Israel would cost

approximately $20,000. Ms. Markheim claims that t h ~ scourt should not dismiss

Chaim Markheim as a defendant in h s case because (1)under the prevailing LFTA

law, Chaim Markheim, the transferor, is considered an essential party and (2) if the

court were to dsmiss Chaim Markheim, Ms. Markheim would have no way of

meeting her burden of proof that Chaim Markl~eimwas not insolvent at the time of

the transfers. Cases interpreting the UFTA do not bear out Ms. Markheim's first contention,

that the transferor is a necessary party to a fraudulent conveyance action3 Rather,

they indicate only that the transferee is a necessary party to a fraudulent conveyance

action because the transferee has an interest in the subject matter of the suit whch

should not be affected by a decree unless (s)he has been gven the right to be heard.

See Nastro v. D'Onofi-ro,263 F.Supp.2d 4 6 , 450 (D. Conn. 2003). See also 37 Am Jur 2d

Frnudzrlent Convqn~zcesand Transfers 188.

The court further agrees with the Committee that it is not responsible for

aidng Ms. Markheim in meeting her burden of proof, if indeed she is called upon

under the UFTA to dsprove Chaim Markheim's presumed insolvency in order to

defend against the Committee's claim. Finally, the court is satisfied, from the affidavit

produced by the Committee of Attorney Leon Fine, that the Committee has diligently

pursued Chaim Markheim and that it is unlikely to be able to find Chaim Markheim

at thts point. Therefore, the court finds that, pursuant to M.R.Civ.P. 21, it is just to

dismiss Chaim Markheim without prejudce as a defendant in thts action.

11. MOTION TO CONFIRM ATTACHMENT AGAINST ANNA MARKHEIM

The motion to confirm attachment is presented on remand from the Law

Court's order of June 29, 2005, vacating thts court's orders (1) to renew the

Committee's attachment in the amotmt of $4,888,308.97, and (2) denying Anna

3 One 2003 bankruptcy case does note, "courts have held that the transferor and the transferee are deemed to be necessary parties to a fraudulent transfer suit." Krol v. Wilcek, 295 B.R. 246 (Bankr. N.D. 111.2003). However, this case makes this statement in the context of determining that a transferee is a necessary party. Further, the case and Bankruptcy Rule section to which the court cites for support of this proposition do not bear it out insofar as it asserts that a transferor is a necessary party. Rather, the cited bankruptcy rule simply indicates that actions before a bankruptcy court are subject to the Federal Rule of Civil Procedure 19, which governs the joinder of necessary parties, and the cited case deals with a suit against an ultimate transferee and an intermittent transferee who then transferred the assets to the ultimate transferee. In other words, neither the case nor the rule support the proposition that the origirial transferor is a necessary party to a fraudulent transfer action. Markheim's ("Ms. Markheim") motion to modify the attachment. Oficial Post

Confirmation Committee of Creditors Holding Unsealred Claims v. Markheinl, 2005 ME 81,

TI.On remand, &us court must reconsider whether it is more likely than not that the Committee will recover judgment in an amount equal to or greater than the aggregate

sum of the attachment. See id. at q19. Specifically, it is the s m of the attachment that

the Law Court found on appeal to be insufficiently supported by the affidavits and

incorporated materials submitted by the Committee in support of their attachment-

related motions4.See id. at ¶ 12.

The Law Court noted that Ms. Markheim did not challenge on appeal the

court's finding that the Committee is more likely than not to obtain a judgment

against Ms. Markheim. See id. However, on remand, Ms. Markheim's Response to

the Committee's Motion for Confirmation of Attachment ("Response") does challenge

the sufficiency of h s finding. In fact, rather than challenge the revised amount

submitted by the Committee in its Motion to Confirm Attachment, the Response

refutes the Committee's likelihood of recovery. See Response at ¶ 19 (stating "Since

Anna Markheim returned $40,000 to Chaim Markheim, the total amount that she

received is only $2,024,688,000.43 [sic].") Therefore, the Court will reconsider the

Motion to Confirm Attachment (1) for the sufficiency of the amount claimed, only

over $2,024,688.43 as well as (2) for the sufficiency of proof that the Committee is more

likely than not to recover judgment from Ms. Markheim.

1. Form of Evidence Allowed in Motion for Renewal of Attachment:

4 The attachment-related motions are (1) The Committee's original motion for attachment, supported by three affidavits; (2) The Committee's motion of subsequent attachment, for which an additional affidavit was supplied by the Committee; and (3) The Committee's opposition to Ms. Markheim's motion to modify the attachment, for which it supplied two more affidavits. The Law Court's June 29, 2005 opinion reaffirms that proper support for a

motion for attachment (or renewal of attachment) must be in the form of affidavits,

and that the court cannot consider evidence not in the affidavits or in docun~ents

authenticated by and incorporated by reference in them. See Markheim, 2005 ME 81 at

91 18. The motion currently before the court from the Committee is supported by the affidavit of Nicl~olasVVals11, an attorney of record for the Committee. affidavit

authenticates and incorporates by reference excerpts from a transcript of a deposition

taken of Ms. Markheim on March 30, 2005, as well as exhbits presented to Ms.

Markheim at that deposition.

2. Sufficienw of Evidence Establishing the Amount Likely To Be Recovered:

The Committee's current motion to confirm attachment requests confirmation

of the attachment ordered against Ms. Markheim only in the amount of $2,064,688.43.

T h s figure is arrived at through tallylng a series of transfers purportedly made to Ms.

Markheim from January 7,2000 through December 20,2001. The affidavit of Nicholas

Walsh in support of the Committee's motion states that these transfers were made

from Chaim Markheim to Anna Markheim, and points to the attached excerpts from

Ms. Markheim's deposition to support h s assertion. The Exhbits and, moreover,

Ms. Markheim's testimony from her deposition, fully support the statements made in

Attorney Walsh's deposition in support of the Committee's Motion to Confirm

Attachment.

The Response contends that Ms. Markheim returned $40,000 of the amount

claimed for attachment by the Committee to Mr. Markheim. Response, 91 19. T h s

assertion is supported only by Ms. Markheim's assertion in her affidavit, at ql 2:

"Plaintiff's summary of checks to me in the Motion to Confirm the Attachment

neglects to mention $40,000 that I returned to Chaim Markl~eirnon March 5, 2000." However, Ms. Markheim points to no documentation in support of h s claim. In the

face of clearly documented evidence of transfers in the amount of $2,064,688.43to Ms.

Markheim from Chaim Markheim, the court finds that it is more likely than not that

the amount transferred to Ms. Markheim from Chaim Markheim, for purposes of

assessing a potential recovery against Ms. Markheim and approving an amount for

attachment, is $2,064,688.43.

3. Sufficiency of Evidence establish in^ the Committee is Likelv to Recover From Ms. Markheim:

The underlying action in h s case for whch the Committee seeks

Confirmation of Attachment is a claim of fraudulent transfer of funds from Chaim

Markheim to Ms. Markheim. Maine has adopted the Uniform Fraudulent Transfers

Act ("UFTA) at 14 M.R.S. 593571 et. seq. Under the UFTA, a creditor who has

obtained judgment on a claim may, if the court so orders, levy execution on an asset

fraudulently transferred or its proceeds. 14 M.R.S. 5 3578. In its original Ex Parte

Motion for Prejudgment Attachment, the Committee submitted in support of its

motion an affidavit of Charles W. Parret, California Counsel for the Committee. T h s

affidavit authenticates a copy of a judgment, dated November 15, 2002, from the

bankruptcy court for the Central District of California, Santa Ana division, that

awarded damages to the Committee against Chaim Markheim in the amount of

$4,833,437.50plus pre-judgmei~tinterest, and avoided the transfer of 13,637 shares of

KSW, Inc. stock from Helionetics, Inc. to Chaim Markheim. T h s judgment awards

damages specifically against Chaim Markheim, and no other defendants. The court

thus finds that it is more likely than not that the Committee is a creditor who has

obtained judgment on a claim against Chaim Markheim, in an amoui~tnot less than

$4,833,437.50. The UFTA defines a transfer made by a debtor as fraudulent where the debtor

made the transfer with actual intent to hnder, delay or defraud any creditor of the

debtor. 14 M.R.S. § 3575(1)(A)5. In determining actual intent under h s test, the

statute lists eleven non-exclusive factors that act as "badges of fraud," indicating an

actual intent to defraud. With respect to granting the Committee's Motion to Confirm

Attachment, the court must determine whether it is more likely than not under h s

test that Chaim Markheim made transfers to Ms. Markheim with an actual intent to

defraud the Committee. The relevant period of time, for purposes of h s

determination, is January 7,2000 through December 20,2001. During h s period, the

Committee was a creditor of Chaim Markheim with an unsecured, disputed,

unliquidated legal claim against Chaim Markheim.6 On the information properly

before the court in the form of affidavits and authenticated supporting documents,

the Court finds that it is more likely than not that Chaim Markheim made the subject

transfers to Ms. Markheim with an actual intent to defraud the Committee.

This is only one of several tests for a fraudulent transfer under the UFTA. The Committee does not indicate in their Complaint for Fraudulent Conveyance which of the tests of a fraudulent transfer they rely on. However, the other tests require a showing of insolvency at the time of the transfer, toward which fact the Committee has failed to introduce evidence. The Committee has not shown that, in the period from January 7,2000 through December 20,2001, Chaim Markheim was generally not paying his debts as they became due or that, in this period, his debts were greater than his assets. See, e.g. the affidavit of Arvel Bowyer at q[ 13, submitted by the Committee, (stating that Chaim Markheim's stock options had a value in excess of $3,000,000 for most of 2000.) See also 14 M.R.S. 5 3573 (definitions of insolvency.) 6 Mrs. Markheim's Response, ¶ 4, notes, "On December 29,1995 Helionetics distributed without consideration all of its shares of KSWI to its shareholders. Plaintiff argued in the underlying action that said transfer was fraudulent to Helionetics' existing creditors. As part of that action, Plaintiff was 'awarded damages against Defendant Chaim Markheim for breach of fiduciary duty. . . in the amount of $4,833,437.50."' The definition of "creditor" under the UFTA includes any person who has a "claim." 14 M.R.S. 5 3572(4). The definition of "claim," in turn, is broad, encompassing any right to payment, "whether or not the right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured." 14 M.R.S. 5 3572(3). Thus, durlng the relevant time period, it is clear that, although the Committee had not obtained judgment against Chaim Markheim, it was a "creditor" of Mr. Markheim for purposes of determining whether he had engaged in a fraudulent transfer with respect to them. First, the Court finds it more likely than not that Chaim Markheim made these

transfers to Ms. Markheim without receiving reasonably equivalent value in

exchange. The court has the following information before it: The Motion to Confirm

Attachment cites to Ms. Markheim's deposition at pages 82-83, in whch Ms.

Markheim states that apart from offering her husband hospitality in exchange for the

transfers of sash, she did not give her husband a n y h n g else of value. The court finds

on this evidence that it is more likely than not that Ms. Markheim received the

transfers without p i n g reasonably equivalent value in exchange.

Second, the court finds it more likely than not that Mr. Markheim had

absconded. The court has the following information before it: The Committee's

original Ex Parte Motion for Attachment, whch was filed with the District Court on

December 11,2003 states that the Committee and Chaim Markheim were, in 2000 and

2001, in the process of resolving their dispute, and that Chaim Markheim had offered

to settle the case, when he "disappeared." ¶¶ 3 and 4. These statements are

supported by a December 5,2003 affidavit of Arvel Bowyer, in whch he states that he

has personal knowledge of the fact that the Committee had a continuing dialogue

toward settlement with Chaim Markheim during 2000 and the early part of 2001, and

that, after settlement negotiations broke down in 2001, the Committee lost all contact

with the Markheims.

Thrd, the court finds it more likely than not that these transfers occurred

shortly before or shortly after a substantial debt was incurred. The November 15,

2002 bankruptcy judgment against Chaim Markheim made fixed, liquidated, and

enforceable against Chaim Markheirn the disputed debt he owed to the Committee

prior to the judgment. The deposition of Arvel Bowyer indicates that he has personal knowledge that Chaim Markheim absconded in 2001, sometime relatively shortly

before judgment was entered against h m in Helionetics' bankruptcy case.

Fourth, the court finds it more likely than not that these transfers were made to

an insider under the UFTA. See 14 M.R.S. 3572 Commissioner's Comment 7 (stating

"a court may find a person living with an individual for an extended time in the same

household or as a permanent cotnpanion to have the kind of dose relationshp

intended to be covered by the term 'insider."') The Motion to Confirm Attachment

states that during the relevant period, Ms. Markheim was Chaim Markheim's wife or

ex-wife, and t h s assertion is supported by Ms. Markheim's deposition at page 160.

Ms. Markheim claims, however, that discovery has produced convincing

evidence that the Committee's judgment claim has been wholly or partially satisfied

by payments received from the co-obligors on the California judgment. Response at 9

23. Ms. Markheim claims that the Committee obtained substantial value from a Susan

Barnes through her agreement to surrender her KSWI stock. Response at 9 17. Ms.

Markheim argues that h s surrender should affect the amount whch Chaim

Markheim owes to the Committee, because he is supposed to have "breach[ed] h s

fiduciary duty" by having hmself accepted shares of KSWI stock without

consideration. Response at 9 4. The documents supplied by Ms. Markheim in

support of her assertion, however, do not indicate that the debt owed by Chaim

Markheim was jointly owed by Susan Barnes. The November 15, 2002 California

bankr~~ptcy judgment refers solely to Chaim Markheim. It awards damages to the

Committee specifically against Chaim Markheim for h s breach of fiduciary duty to

Helionetics, and makes no reference to Susan Barnes as a joint tortfeasor against the

company. On the basis of h s infonnation, properly presented to the court in tlie

Committee's vanous motions with respect to athchrnent, and absent sufficient-

evidence by Ms. Marldteim rebutting h s evidence, the court finds it more likely than

not that the Committee will be able, under t l ~ eUFTA, to levy execution against Ms.

Markl~eim'sassets, either as assets fraudulently transferred from Chaim Markheim or

as proceeds thereof, in the amount of $2,064,688.43. See 14 1vI.R.S. 3578. r

The order is:

The Committee's Motion to Dismiss Chaim Marldleim without prejudice is GRANTED; the Committee's Motion to Confirm Attachment Against Anna Markheim in the amcxtnt of $2,064,688 is GRANTED.

Dated at Portland, Maine this day of ,2005.

/ ~ustice,Superior Court Susan J. Szwed, Esq. - PL Nicholas Walsh, Esq. - PL G. Charles Shumway, 11, Esq. - DEF. ANNA MARKHEIM